Suppose the deferred compensation component of an executive\u2019s change of control or employment agreement, or the company\u2019s executive compensation plan, contains hurdles or exceptions to vesting or, even, a cliff vesting provision \u2013 such as requiring employment for at least five years before entitlement attaches. Suppose the executive is denied benefits based on disputed factual allegations, or is terminated after being employed for four years and ten months.\u00a0 Is the compensation lost?\u00a0 That may depend on whether the executive can successfully challenge the adequacy and fairness of the benefit denial process or, alternatively, prove that the reason for the termination was to prevent the vesting.<\/p>\n
Under Massachusetts contract law, neither party is necessarily given deference in their decision making; and if the company terminated the executive to prevent vesting, the company may be held to have breached the covenant of good faith and fair dealing, as that covenant is applied to executive employment agreements under Massachusetts law. See, e.g., Williams v. B&K Medical Systems, Inc.,<\/em> 49 Mass. App. Ct. 563, 569 (2000) (such covenant requires that neither party do anything to rob the other of the fruits of the contract); see also Cataldo v. Zuckerman<\/em>, 20 Mass. App. Ct. 731 (1985) (where identifiable, future benefit is reflective of past services and specifically related to such past services, covenant applied where employee terminated prior to completion of project in which he was to have received interest); Fried v. Singer,<\/em> 242 Mass. 527, 531 (1922) (where performance is to be evaluated per the satisfaction of the employer, the employer must act in \u201cgood faith\u201d in making such evaluation).\u00a0 If the executive is forced to incur legal fees and other costs to enforce contractual rights, e.g. the covenant of good faith and fair dealing, those costs (including legal fees) may be recoverable against those who tortuously interfered with contractual rights. See, e.g., O\u2019Brien v. New England Tel & Tel, Co., <\/em>422 Mass. 686, 696-97 (1996).<\/p>\n But what if Massachusetts law does not apply and the applicable law does not include comparable doctrines?<\/p>\n Relying on Federal law, executives may allege that they are the beneficiaries of what are called top hat plans and seek the protections of the Employee Retirement Income Security Act of 1974 (ERISA). A top hat plan is a plan which is \u201c\u2018unfunded\u2019 and \u2018maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.\u2019\u201d Alexander v. Brigham & Women\u2019s Physicians Org., Inc.,<\/em> 513 F.3d 37, 43 (1st Cir. 2008) (quoting 29 U.S.C. \u00a7 1051(2)).\u00a0 Even a single beneficiary plan \u2013 such as individual employment agreements – may be a top hat plan. See O\u2019Leary v. Provident Life and Accident Ins. Co., <\/em>456 F. Supp. 2d 285, 294 (D. Mass. 2006).<\/p>\n Top hat plans are exempt from many ERISA requirements, such as the fiduciary requirements imposed by ERISA on plan administrators; and the standard of review to be applied by a court in reviewing a benefit denial may be an enforceable provision of the plan. However, as held in a case recently decided in Massachusetts, top hat plans are subject to many of ERISA\u2019s procedural requirements, including, but not limited to, those of 29 U.S.C. \u00a7 1133 (also known as ERISA \u00a7 503) regarding adequate written notice of the specific reasons for denial of benefits and a full and fair review. See McCarthy v. Commerce Group, Inc.,<\/em> Civil Action No. 09\u2013CV\u201310161\u2013PBS, 2011 WL 6357800, at *17-20, 27-28 \u00a0(D. Mass. Dec. 16, 2011) (awarding attorney\u2019s fees and ordering that such review be conducted by a neutral investigator approved by the court). \u00a0In McCarthy<\/em>, the court held that, even though the contract in question provided deference to the plan administrator\u2019s decisions, the standard of review would be deferential only to the extent that the plan administrator acted reasonably and in good faith. See id.<\/em> at *16-17.\u00a0 The court further held that procedural irregularities constitute an abuse of discretion when they are serious, have a connection to the substantive decision reached, and call into question the integrity of the benefits denial decision itself. See id<\/em>.<\/p>\n Furthermore, the court noted that \u201cputting on a top hat doesn\u2019t mean you can forget the conflict tails\u201d and that the \u201cstructural\u201d conflict of interest \u2013 i.e., the financial incentive of the plan administrator to deny the benefits claim\u2014must be factored into the court\u2019s determination regarding abuse of discretion. See id.<\/em> at *21-22.\u00a0 Specifically, \u201c[t]his conflict of interest fundamentally undermines the integrity of the \u2026 decision-making process, in part, because [the plan administrator] took no steps to mitigate the effects of this conflict by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision-making irrespective of whom the inaccuracy benefits\u2026.\u201d See id.<\/em> at *22 (internal citations omitted).\u00a0\u00a0 In so holding, the court applied, inter alia<\/em>, MetLife Insurance Company v. Glenn<\/em>, 554 U.S. 105, 108, 117 (2008) which holds that a structural conflict of interest – rising from a dual role as an ERISA plan administrator and the payer of plan benefits – is \u201ca factor in determining whether the plan administrator has abused its discretion \u2026\u201d and that \u201c[t]he conflict of interest … should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision.\u201d<\/p>\n A different strategy is dependent not on the company\u2019s procedural failures but, rather, on proof of unlawful motive. If an executive\u2019s employment is terminated so as to prevent vesting in benefits available under a top hat plan, such termination is unlawful, and, if not remedied as a result of the full and fair review, \u00a0actionable against both the company and any individuals who took part, because it is \u201cunlawful for any person to discharge \u2026 for the purpose of interfering with the attainment of any right to which such participant may become entitled under\u201d an ERISA-governed plan. 29 U.S.C. \u00a7 1140 (also known as ERISA \u00a7 510).<\/p>\n Suppose the company asserts that it had discretion to terminate the executive\u2019s employment at will, or even good cause to do so. Neither assertion, in and of itself, defeats an ERISA \u00a7 510 claim.\u00a0 If one or more lawful explanations for the termination are asserted, the executive need only prove that those accused of violating ERISA \u00a7 510 were \u201cat least in part motivated by the specific intent to engage in activity prohibited by \u00a7 510.\u201d Dister v. Continental Group, Inc.,<\/em> 859 F.2d 1108, 1111 (2nd Cir. 1988); see also Barbour v. Dynamics Research Corp.,<\/em> 63 F.3d 32, 37 (1st Cir. 1995) (citing Dister<\/em> for the proposition that the \u00a7 510 plaintiff\u2019s obligation was to prove that the interference with benefits was a \u201cmotivating factor\u201d).\u00a0 Moreover, if a structural conflict of interest exists, the holding of MetLife Insurance Company v. Glenn<\/em>, discussed above, will apply.<\/p>\n Under 29 U.S.C. \u00a7 1132 (also known as ERISA \u00a7 502), in a civil action, an executive may obtain plan benefits, equitable relief, and attorneys\u2019 fees and costs; provided, however, in an ERISA \u00a7 510 action, plan benefits are likely unavailable under the terms of the plan, e.g., if the terms of cliff vesting have not been met. Equitable relief may, however, take the form of a monetary award, e.g., the amount by which the wrongdoer was unduly enriched by the unlawful conduct. See, e.g., Great-West Life & Annuity Ins. Co., <\/em>534 U.S. 204, 215 (2002) (noting that restitution is amongst the \u201ccategories of relief typically available in equity\u201d); Michaud v. Forcier,<\/em> 78 Mass. App. Ct. 11, 16-17 (2010) (awarding equitable relief so as to prevent wrongdoer from benefiting from wrongdoing in reliance on general principle that \u201cequitable remedies are flexible tools to be applied with the focus on fairness and justice\u201d) (internal citations omitted).<\/p>\n In conclusion, by relying on ERISA \u00a7 503 and 510, and ERISA \u00a7 502, executives may successfully challenge factually disputed benefit denials and avoid the harsh consequences of cliff vesting provisions in deferred compensation arrangements.<\/p>\n","protected":false},"excerpt":{"rendered":" Suppose the deferred compensation component of an executive\u2019s change of control or employment agreement, or the company\u2019s executive compensation plan, contains hurdles or exceptions to vesting or, even, a cliff vesting provision \u2013 such as requiring employment for at least five years before entitlement attaches. Suppose the executive is denied benefits based on disputed factual […]<\/p>\n","protected":false},"author":9,"featured_media":51,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[],"tags":[],"class_list":["post-50","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"\nTop Hat Plans<\/strong><\/h3>\n
ERISA \u00a7503<\/h3>\n
Abuse of Discretion and the Structural Conflict of Interest<\/h3>\n
ERISA \u00a7 510<\/h3>\n
ERISA \u00a7 502<\/h3>\n